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To Our ShareholdersThird quarter earnings per share reached a record $0.35, after adjusting for the two-for-one stock split which occurred on September 29, 1997, for shareholders of record on September 2, 1997. This represents a 13.9 percent increase over third quarter 1996 earnings per share of $0.31, excluding the impact of the one-time, pre-tax charge of $10.2 million, or $0.10 per share, mandated by federal legislation in the third quarter of 1996 to replenish the Savings Association Insurance Fund (SAIF). Third quarter net income reached a record $22.0 million, which is 9.6 percent above the same 1996 period, excluding the $6.7 million after-tax SAIF charge.FirstMerit continues its strong profitability performance. For the third quarter, return on average equity and return on average assets were 16.91 percent and 1.66 percent, respectively, compared with 15.24 and 1.47, respectively, in 1996 after adjusting for the SAIF assessment. Net interest income on a fully tax-equivalent basis was $64.6 million for the third quarter, essentially unchanged from the same quarter last year. A 20 basis point improvement in the net interest margin to 5.20 percent was offset by the planned decline in average earning assets. The asset mix continues to shift toward more profitable consumer and commercial loans, funded by the sale of securities and lower-yielding residential mortgages. Compared with the second quarter of 1997, the net interest margin declined eleven basis points, from 5.31 percent, due to an increase in the level of interest-bearing liabilities. Excluding securities gains from each quarter, non-interest income rose an impressive 21.7 percent to $21.7 million for the third quarter, from $17.8 million a year ago. Improvement was reported in nearly every category. Operating expenses were $48.3 million for the quarter, flat compared to the prior year quarter after adjusting for the SAIF assessment. As a result of strong growth in non-interest income and well-controlled expenses, the efficiency ratio improved to 55.49 percent compared with 58.45 percent for the third quarter of 1996. Non-performing assets were 0.31 percent of total loans and other real estate-owned compared to 0.28 percent last year. Net charge-offs to average loans, on an annualized basis, were 0.48 percent, the same as last year. The allowance for loan losses was 4.8 times the level of non-performing loans at September 30, 1997, up from 4.5 times coverage at the end of the 1996 third quarter. As authorized by the Board of Directors at their August meeting, the cash dividend paid for the quarter was $0.16 per share, a 10.3 percent increase above the prior year level. This represents an annual rate of $0.64, after adjusting for the two-for-one stock split. Shareholders' equity at quarter end was $520.4 million, down from $523.7 million at December 31, 1996 due to share repurchases as part of an on-going capital management program. The Board of Directors, at their July meeting, authorized a new program to purchase up to 3.0 million shares, or 4.8 percent, of outstanding FirstMerit stock. During this quarter, we refined our focus to deliver world-class customer service. Carrie Tolstedt assumed responsibility for Marketing, Product Development and Sales Development, in addition to remaining CEO of Citizens National Bank and Peoples National Bank. Robert Brecht, Executive Vice President, will now be responsible for Retail Administration, including the administration of branches, automated teller machines and the new consolidated call center, which allows customers 24 hour-a-day access to account information. We've had a number of changes which will make FirstMerit a stronger, more competitive organization. Robert Kindsvatter was promoted to Corporate Controller. Greg McDermott joined the Abell & Associates team as Executive Vice President and Chief Operating Officer. Lastly, Robert Morlan was promoted to Executive Vice President and Managing Officer of Citizens National Bank. FirstMerit began its conversion to a single charter in this quarter. First National Bank of Ohio changed its name to FirstMerit Bank, N.A., effective September 1, 1997. Old Phoenix National Bank and EST National Bank were merged into FirstMerit Bank, N.A. on October 14, 1997. The three remaining affiliate banks will become part of FirstMerit Bank, N.A. during the first quarter of 1998. The conversion to a single charter will allow FirstMerit customers access to all 128 FirstMerit branches, while also providing certain operating efficiencies. Each former affiliate will continue to operate as a community bank, with its own Community Board, and with local executives making loan and pricing decisions. We regret that Robert Carter has resigned as a Director of the Corporation for personal reasons. We thank Bob for his years of dedicated service to FirstMerit. We will not be issuing a fourth quarter report. As in the past, 1997 fourth quarter financial information will be included in the 1997 Annual Report. Accordingly, there are two recent developments that should be mentioned here. On October 8, 1997, FirstMerit signed an agreement to acquire three branches with $49 million of deposits from First Western Bancorp. This represents an opportunity to expand the market share of FirstMerit Peoples Bank in Lake County, an important FirstMerit market. We anticipate a first quarter 1998 closing. On November 2, 1997, FirstMerit signed a definitive agreement to acquire CoBancorp in a transaction valued at $157 million. CoBancorp, headquartered in Elyria, Ohio, has $666 million in assets and the leading deposit market share in Lorain County. The acquisition is expected to close in the second quarter of 1998. We look forward to welcoming CoBancorp's two subsidiaries - PremierBank & Trust and Jefferson Savings Bank - to the FirstMerit family of community banks. It is gratifying to see the progress of FirstMerit reflected in our outstanding stock performance this quarter. Thank you for your ongoing support.
John R. Cochran
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
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